Tagged: Equity Mutual Funds

ATM :: Why active funds beat the markets in India

On an average, the gross returns by active funds exceed returns from Nifty by more than 11%. This outperformance is after accounting for the costs of managing an active fund
Nilesh Gupta & G. Sethu | First Published: Mon, Oct 02 2017. 01 59 AM IST | Live Mint

ATM

In 1975, John Bogle launched the first ever passive fund, Vanguard 500 Index Fund, and heralded an era of passive investing. Bogle was influenced by Eugene Fama’s view that the capital market was informationally efficient and that sustained success in stock picking was impossible. Since then, trading has increased; more and better investment research is being undertaken; high-speed communication networks have taken away the advantages to a privileged few; and most importantly, institutional investors dominate the markets. In this environment, it is not easy to pick stocks or enter and exit the market successfully and consistently. The torchbearer for passive investing today is the exchange-traded fund (ETF).

In the US, during FY 2003-16, total net assets of equity index funds increased by 3.5 times (from $0.39 trillion to $1.77 trillion), while that of active equity funds increased by just 0.7 times (from $2.73 trillion to $4.65 trillion). More importantly, during this period, a net amount of $1.29 trillion moved out of active equity funds while $0.46 trillion moved into index equity funds. Why is passive investing gaining over active investing? It’s because active investing has not been able to deliver returns (net of costs) that are more than from passive investing. Passive funds posted an expense ratio of 0.09% in 2016 while active equity funds were seven times more expensive with an expense ratio of 0.63%.

The FT reports that over a period of 10 years, 83% of active funds in the US underperform their benchmark, with 40% funds terminating before 10 years.

This global trend prompted us to examine the India story. Since 1992, Indian stock markets have seen many developments. Trading has increased; there are more institutional investors; regulations have improved; transactions have become faster; settlements have become shorter; number of analysts covering the market has increased; communication networks are good. We should expect active funds to struggle to beat the market, right? You could not be more mistaken.

We examined the returns and expense ratios of 448 actively managed mutual fund schemes from the period of FY 1996 till FY 2017, a total period of 21 years. We used their net asset values (NAVs) to compute the returns from holding these schemes for each financial year. Remember that the NAVs of mutual fund are published after deducting all the costs incurred in running the scheme.

In most of the years, when the market booms the active funds beat the index (such as Nifty) by a wide margin. When the market is bearish, their performance is mixed. In some bearish years, they beat the index, but often they lose much more than the index.

On an average, the gross returns by active funds exceed returns from Nifty total returns index by more than 11%. Remember that this outperformance is after accounting for the costs of managing an active fund. What about the costs of managing a mutual fund? The expense ratio for active funds from FY 2008 to FY 2017 averaged 2.32% per annum and for ETFs it was 0.61%, leading to a difference just greater than 1.7%. On an average, in India the extra returns provided by actively managed mutual funds have been much higher than the extra cost charged for delivering the return.

This is in contrast to the data from the US. Even in the halcyon 1960s, active funds in the US beat the market only by about 3%. What are the possible reasons for this outperformance? Some market experts argue that several quality stocks are not part of the index and hence index funds or ETFs cannot invest in them. Some note that the evolving nature of the market is not reflected in the index.

It may also be possible that the relatively smaller size of the mutual fund industry in India could be helping active fund managers get such high returns. In India, the mutual fund industry has only 13% of market capitalization as compared to 95% in the US. It is possible that in the past, mutual fund managers had better information available. If either of the reasons turn out to be true, we might find that, in the future, the actively managed mutual funds do not outperform the market by such large margins.

So, should Indian investors invest their savings in actively managed mutual funds? Irrespective of what the data says, the answer is not so simple. Here we have only considered the average returns of all actively managed mutual funds. A retail investor who is likely to invest only in a limited set of schemes would be concerned about choosing those schemes that give better returns in the future.

This analysis has not considered the risks taken by the mutual funds to get returns. A fund can easily beat the market by taking more risks. We need to compute the risk-adjusted returns to answer this question. On doing that, we may understand how the active funds in India generate such high returns compared to the market index. Is it a story of great fund management skills? Or is it inefficiency of the market? Or is it a case of taking high risks? Investors and the regulator have a responsibility to understand this.

Nilesh Gupta is assistant professor and G. Sethu is professor at the Indian Institute of Management, Tiruchirappalli

Source: https://goo.gl/1BK5FJ

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ATM :: How is your mutual fund performing? Triggers that should alert you to exit

Sarbajeet K Sen | Sep 14, 2017 11:37 AM IST | Source: Moneycontrol.com
Poor performance of a fund must set the investor thinking on whether to continue with the investment.

ATM

When did you last review your mutual fund portfolio? Maybe a long time ago. Many investors might feel relaxed after investing in mutual funds with the thought that their money is safe with experts trained in investing and stock selection.

However, the mutual funds landscape is a mixed lot. There are good, high-performing funds and there are laggards who are unable to keep up with performance of the leaders.

Did you check which of these category of fund you have invested? If it is one of the top-performing ones, giving you good returns, you need not worry. But if it is one of the funds that have not performed well in comparison, it might be time to think of a switch to another fund.

So when did you last review your mutual funds investment portfolio to know whether it needs a change? If you do it periodically, well and good, but if you have not reviewed for a long time, you should assess how your various fund investments have been performing.

“Investors should review their mutual fund portfolio at least once in 6 months. They should look at the performance of the fund, the sectoral allocation that they chose and whether there have been any big changes,” S Sridharan, Business Head, Financial Planning, Wealth Ladder Investment Advisors

Sridharan says if the review shows that the fund has performed poorly, it should signal a possible exit and switch to another fund. “Poor performance of a fund must set the investor thinking on whether to continue with the investment. However, exit decision should not be based only on performance of the fund. Investors should look at other parameter like what went wrong and whether the fund manager has the capability of revising the portfolio to the positive side in the near future,” he said.

Vikash Agarwal, CFA & Co-Founder, CAGRfunds, says one should avoid unnecessary churn in portfolio. “The essence of money-making is regular investments in well-managed diversified equity mutual funds. One should avoid unnecessary churns in the portfolio which may enhance cost in terms of exit load and tax implications,” he said.

However, Agarwal says there can be multiple reasons which might merit a review and change of one’s mutual fund holdings. Some of these are:

Continued underperformance of the fund such that the fund is unable to beat its benchmark

-The fund is able to beat the benchmark but the returns are not commensurate with the levels of risk being taken by the fund

-A particular stock/debt instrument holding which forms a significant holding of the fund is likely to underperform due to a fundamental issue. Example: If a fund has significant exposure to a company which has acquired a loss making company, it might merit a deeper review of the fund

Change of fund manager: In case there is a change in fund manager, then it is useful to review the fund as the fund style and philosophy might undergo a change and it might not be suitable to investment objective anymore

“If your fund is showing such characteristics then it is ideal for you to exit and switch to a better managed fund,” Agarwal said.

Source: https://goo.gl/dKawWa

ATM :: How equity mutual funds can pave your way to becoming a ‘crorepati’

Navneet Dubey | Sep 19, 2017 04:18 PM IST | Source: Moneycontrol.com
Equity mutual funds can give you good returns if you keep your money invested over a long period of time to overcome market cycles.

ATM

Your dream of becoming a ‘crorepati’ may seem difficult. But in reality, if you plan your finances and invest in the right instruments someday you will have your dreams realised someday. One of the best ways to try and achieve the crorepati dream could be investing in equity mutual funds for good returns over a long period of time. There is a definite correlation between the time and money. If you have less money to invest then you have to wait for a longer time to get your goal accomplished and if you have more money to invest you might reach your goal earlier if you plan and invest properly.

However, before investing in mutual funds, especially –equity MF’s, you should ask yourself two questions:

how much you have to invest and over how long to reach your Rs 1 crore destination.

Here we try to get you answer to both the questions.

How much to invest monthly?

As a young investor, you may easily take a higher risk by saving less amount and gain more returns to achieve your financial goals. While being in the middle of the age, you can take the moderate risk to head toward becoming a crorepati.

Thus, at an early age even if you have less money to invest, you can become crorepati by investing Rs 700 per month (which is the least amount) for 35 years, at an assumed 15% rate of return to accumulate the desired amount.

However if you start later, you need to invest more money to reach your financial goal. For instance, you will need Rs 5500 per month for 25 years, at an assumed 12% rate of return, you will be able to make Rs 1 Crore approximately.

A larger amount of Rs 13,500 per month for 20 years, at an assumed 10% rate of return, will enable you to make Rs 1 Crore.

investment grid

How to select a fund?

To earn 12-15% of return on your investment, you need to select good equity stocks or one can go for equity mutual funds to mitigate the risk to an extent. While selecting, equity MF, you need also check that your portfolio should have mid-cap/small-cap funds for around 30-40% and the remaining 60-70% should have a diversified fund, a large-cap fund, etc. to maintain an aggressive portfolio with right asset mix.

Whereas to maintaining a return of around 10-12%, you should invest in balanced fund/hybrid fund, etc. to maintain a moderate risk portfolio. In such case, one can avoid or reduce the investment amount in mid-cap/small-cap funds or avoid making investments in risky stocks.

Are there alternatives?

Investing money in pension plans, NPS can also help you achieve this financial goal. However, the returns offered under such schemes are not stable and market linked. Moreover, in some instruments, returns are subject to change as per the government rules. Also, investing in an instrument like fixed deposits, national savings certificate, etc. may not help you achieve the goal within the maximum time period as mentioned thereon.

One should also have to remain invested for a longer time period and follow proper asset allocation strategy to achieve the target amount. It is must to take the help of a financial adviser before making such financial decisions.

In the grid given above, make sure you know that any investment made in equity mutual fund or equity stocks are not guaranteed. The returns are also volatile and not fixed as they are dependent on the financial market.

Source: https://goo.gl/3sQvvt

ATM :: How much should one invest in debt or equity oriented schemes?

TIMESOFINDIA.COM | Sep 1, 2017, 12:36 IST

ATM

You can invest in mutual funds with amount as low as Rs 500. There is no upper limit for investing in mutual funds. Each mutual fund – be it equity or debt – has certain risk due to volatility and uncertainty in market. Ideally, you should be investing 10-20 per cent of your savings in mutual funds through monthly SIP.

Here are few points that you should keep in mind while investing in a debt or equity oriented schemes:

1) Goal
List down all your short-term and long-term goals in future such as holiday, marriage, children, education of children, retairment etc. Invest more into equities for your long-term needs as it is greatly possible to be aggressive in such cases. For your short-term needs, mutual funds with 1 year lock in can be adopted.

2) Risk capacity
The amount of investment risk you are able to take on is generally determined by your financial condition. Sudden financial shocks such as job loss, an accident etc. can affect your investment decisions by altering the amount of risk you’re able to afford. Your financial commitments such as home loan, business loan, car loan, expenditure in kids education etc. may also affect your investment risk capacity.

3) Age
When it comes to investing, age is as big factor as the other two mentioned above. The best time to start investing is when you are young. The best time to learn about the markets and how to deal with its risks is when you’re young. Young investors have decades before they need the money. They have more time for their investments to recover and make up the shortfall. Once you are into your 30s and 40s, allocate a greater fraction of your portfolio to minimal risk funds or long-term funds. Also allocate some money to equity funds for your aggressive goals.

4) Fund selection – debt or equity
Debt funds can give you steady returns but in a constant range. Since debt funds invest money in treasury bonds, there’s much less risk associated with them. Debt funds are good investment option when market is volatile. Equity mutual funds give good returns over the long period to time as compared to debt funds. However, the possibility of losses and negative returns is also higher when market is volatile. Equity funds are good when the markets are booming.

You may also consult financial experts before taking final decisions. Mutual fund agents and distributors can also help you in this regard.

Source: https://goo.gl/S9RnDz